Trickle Down Economics doesn’t work. Let’s shake it up with the Salad Dressing Theory of Economics (Take 4)

After even more thinking about how to address issues of social in-equality, I updated the original article.  So here is the updated version (Take 4, 6 Feb 2013).

Trickle Down Economics isn’t working the way it was intended and never did.

What’s really happening is more like the separation of Oil and Vinegar. The more you let an economy stagnate, the more the wealth floats to the top like Oil and ends up in the hand of the rich with less in the hands of the poor. But having all the oil on top makes terrible salad dressing. Separation continues until someone creatively does something about it.

There are two scenarios that we are seeing playing out (and a third scenario that could make a difference):
1) The poor can shake up the economy or,
2) The rich can shake up the economy or,
3) (
The government can shake the economy)

The Solution of the Oppressed

Occupy Wall Street, riots in the Eurozone, and North Africa’s Arab Spring are all examples of how the oppressed tend to shake things up. Since their resources are limited, they use whatever means they have available to them. Rioting and demonstration is one tool. Their other tools, if they are lucky enough to live in a functioning democracy, and wise enough to recognize the myth that jobs are created by lowering taxes for the rich, is to vote for representatives that actually support their interests, who support development of the economy through regulating and ensuring equity. Here is an article (A Rich American Destroys The Fiction That Rich People Create The Jobs) that accurately dispels this particular myth and which also supports the Salad Dressing Theory of economics.

Another approach is to empower the poor by helping them to recognize their own assets and help them to build using collective assets. While in Uganda, I had an opportunity to participate in a community meeting called a Village Savings and Loans Association (VSLA). I also met with the head of a community based Credit Union. Particularly in the global south, these VSLAs encourage women to work together to save small amounts of money each week, the equivalent of 20 cents-$2.00 each. The amounts of each contribution are tracked by the treasurer who receives training. The group purchases its own accounting ledger. After saving enough, they are allowed to borrow 3 times their total contribution from the VSLA and they pay interest to the group for short term loans which they generally use for buying chickens or goats, although they are allowed to use the money for any reason provided they guarantee its return with interest. Gradually they learn and improve their business skills to be able to grow this small amount of collective money and begin their own businesses and their own community lending programs without the benefit of micro-finance organizations. Although such efforts should be unnecessary in the global north, whether such collective efforts might help the poor in our communities to advance and have a greater voice is an interesting question. During their collective community meetings, the women and a few men who participated learned not only to address financial needs of the community but also designate a part of their meetings for addressing social needs. In some of these groups, men have been allowed to participate as long as they don’t attempt to subvert the power of the women.

Solution of the Wealthy

If the wealthy recognize the fundamentals of this principle (i.e. that the wealth always rises through the instrument of profit), they should have no fear in shaking things up.

In order for the economy to be revitalized by the rich, it has to be shaken to mix the wealth into the poverty just as oil into vinegar in salad dressing. Since, wealth naturally floats back to the top, there has to be a way of continuously pumping the wealth to the bottom members of society. Only then will they have enough money to spend to keep the economy moving.  The article above rightly points out that Henry Ford realized this principle and ensured that he always paid his workers enough to become his customers.

Another way, however, is through investments in the poorest sectors of society that benefit the poor in tangible ways. The following article is another example of that kind of mixing. Adidas is planning to sell a kind of Reebok running shoes in India for $1.00 using local labor and materials. At first, they may loose money but it will come back to them in the form of social capital and eventually profitable business.

What, Why: How can Rebook sell trainers for $1

(Note: One of my classmates rightly pointed out an interesting environmental issue with this, namely that if the trainers are built too cheaply or with non-recyclable materials, billions of used trainers will clutter-up land fills. Good point Greg, lets hope that Adidas contemplates plans for recycling, provided incentives for returning them, and thus reduces their material costs.)

Similar to the Ford example, the Tata Nano, a $2000 car, built for the masses in India, helps get families off dangerous motorcycles and into cars and is another great example of making products that the masses can afford. Another recent example is the $35 tablet computer that is being built in India. While not being the most elegant, it is functional and can replace books, provided that solar chargers are part of the equation.

(Note: The concept of having individual transportation driven by gas is ultimately not sustainable, so while I cite this as an example of creative economic stimulation that helps the masses, I actually hope that India and all other countries for that matter very quickly recognize the need for better designed communities that limit transportation requirements, improve public sector transportation systems, engage renewable power and utilize electric vs. gas vehicles. Are there any creative electric bus builder out there that wants to step up to the challenge with a solar powered transportation solution? I also believe that Tata has bought rights to compressed air technology which might eventually power their cars with electricity using a compressor.)

If we want to look at solutions to many of the economic problems, the wealthier countries, companies and individuals need to create vital and thriving partnerships with the poorer nations and people to provide opportunities  goods and services which genuinely benefit the poor. As the poor benefit from wealth, the rich will also benefit.

The Government Solution

Government can play a role by building sustainable infrastructures, developing renewable energy powered transportation systems, investing in education and research and through taxation of wealth, wherever it is hiding, to redistribute some of it to the majority of the people in the world who are becoming poorer.

But there are other ideas that merit examination and study. While I don’t know for certain that these answers will all bear the expected result, it would certainly be interesting to explore them and to track the results over a twenty or thirty year period. For example:

  • Higher taxation of wealth is  necessary especially if the wealthy are unwilling or lack the creativity to shake things up. Higher estate taxes, especially of the extremely rich, are one means of redistributing extremes of accumulated wealth. As we are all born equal in the site of God, is it not reasonable that we should all be granted a more equal start in life?
  • Sadly, in some governments, it is the government elite that are the problem. Kenya, for example, pays some of the highest MP salaries in the world. There has long been a myth that paying public leaders more will attract the best and brightest and that higher salaries are necessary to compete with corporate salaries. But public leaders should necessarily be individuals who see the need for greater equity and who do not wish to support the extremes of wealth which are often generated through unbalanced wealth distribution currently found in the corporate world. While excellent fiscal managers are required, there is no guarantee that a highly qualified business person will make the correct decisions for a society. These are two different situations and creating larger public salaries to attract the “best and brightest” from the corporate environment may be the wrong incentive entirely. Instead, try lowering the salaries, of course to reasonable living wages with reasonable pension plans (after all even public officials deserve a reasonable living), and give additional financial incentives when these leaders succeed in balancing public budgets while ensuring a higher quality of life for all constituents through wise investments in infrastructure and public services. This way you attract those who truly believe in equity and who understand that we are all shareholders of our collective wealth. If leaders have enough wealth to send their own children to private schools, what incentive do they have to fix broken public school systems?
  • Global regulations would also be helpful regarding cross border taxation and global multinationals who hide their money by creating tax shelters in zero tax countries. The recent examination by the British Government of multinational companies such as Google, Amazon and Starbucks and many others that pay no little or no tax in a country while raking in high revenues, is an example of the desperate need for global taxation policy and regulation.  Poor countries are impacted even more buy such abuses when multinationals gain tax breaks, allegedly to spur FDI, and then use tax avoidance methods while draining developing countries of valuable resources. Come on G20 –  step up to the task. Wishful thinking…

Sharing Ideas

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Wishing you all good health and happiness,

Garth

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